United StatesDepartment ofAgriculture

AgriculturalMarketingService

Transportationand MarketingPrograms

Marketing andTransportationAnalysis

January 2000

The Panama Canal in Transition:Implications for U.S. Agriculture

The Panama Canal in Transition:Implications for U.S. Agriculture

by Ken A. Eriksen

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Abstract

As part of the Panama Canal Treaties of 1977,the United States turned over to theGovernment of the Republic of Panama onDec. 31, 1999, its control of the Panama Canal,which it financed, built, and maintained. U.S.agricultural shipments are cargoes important tothe canal. In 1998, they made up more thanone-fifth of the canal cargo volume, more thantwo-thirds of all agricultural shipments, andmore than half of the U.S. cargo volume trans-ported through the canal. The canal is alsoimportant to U.S. producers of corn and soybeansin that it gives them an efficient and effectivetransport route to foreign markets. Without thecanal, it is estimated that U.S. exports of cornand soybeans could be 2 percent lower, whichwould lower producer revenues by $303.6 mil-lion. This report addresses how the PanamaCanal transition to Panamanian control willaffect U.S. agriculture.

Key words: Grain transportation and PanamaCanal

Acknowledgments

The author appreciates and thanks the PanamaCanal Commission staff, Maria de Sanchez,Sylvia de Marruci, and Dr. Victoriano Morenofor arranging meetings in the Canal Zone andthe partial transit of the canal. Special thanksalso to Daryl Ricard, general manager withBarwil Agencies (NA) Inc., who assisted withcontacts and vessel information in New Orleans.

The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basis of race, color, national origin,sex, religion, age, disability, political beliefs, sexual orientation, or marital or family status. (Not all prohibited bases apply to all programs.)Persons with disabilities who require alternative means for communication of program information (Braille, large print, audiotape, etc.) shouldcontact USDA’s TARGET Center at (202) 720-2600 (voice and TDD).

To file a complaint of discrimination, write USDA, Director, Office of Civil Rights, Room 326 W, Whitten Building, 1400 Independence Avenue,SW, Washington, D.C. 20250-9410 or call (202) 720-5964 (voice and TDD). USDA is an equal opportunity provider and employer.

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Contents

Abstract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii

Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii

List of Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv

List of Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv

List of Photographs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Panama’s Politics and Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Panama Canal: Development, Importance, and Post-Treaty Transition. . . . . . . . . . . . . . . . . . . . . . . . 7

Development of the Panama Canal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Importance of the Panama Canal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Post-Treaty Transition of the Panama Canal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Panama Canal Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

World Trade and the Ocean Fleet Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Expanding the Canal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Environmental Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Port and Rail Privatization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

U.S. Agriculture and the Panama Canal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Appendix: Shipping a U.S. Grain Cargo Through the Panama Canal. . . . . . . . . . . . . . . . . . . . . . . . 27

Bibliography. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

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List of Figures

Figure 1–North and South America and trade routes through Panama. . . . . . . . . . . . . . . . . . . . . . . . 2

Figure 2–Total U.S. exports, U.S. agricultural exports, and cargo volume transiting the Panama Canal, 1989-98 (million metric tons) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Figure 3–Ocean rate comparison from U.S. Gulf to Japan, via Panama Canal versus around the Cape of Good Hope ($ per metric ton, based on a grain shipment of 52,000 metric tons) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Figure 4–Estimated U.S. corn and soybean flows (million metric tons) resulting from increasing Panama Canal tolls and closing the canal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Appendix Figure A–Profile of the Panama Canal System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

List of Tables

Table 1–Panama Canal traffic, transits, tolls, cargo, and Panama Canal Universal MeasurementSystem (PC/UMS) tonnage, fiscal years 1989-98. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Table 2–Panama Canal oceangoing transits and cargo (million metric tons) by direction,fiscal years 1989-98 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Table 3–Principal agricultural shipments (million metric tons) via the Panama Canal,fiscal years 1989-98 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Table 4–Panama Canal cargo volumes (million metric tons) by U.S. origin coast,total, and agricultural cargoes, fiscal years 1989-98. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Table 5–Historical toll rates (in U.S. dollars) per Panama Canal Universal Measurement System net ton (PC/UMS), 1914-present . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Table 6–World trade growth compared to fleet growth, 1998-2002. . . . . . . . . . . . . . . . . . . . . . . . . . 15

Table 7–Estimated U.S. grain inspections (million metric tons) for export transiting the Panama Canal, 1989-98. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Table 8–Projected U.S. Gulf grain exports (million metric tons) using the Panama Canal to 2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Table 9–Estimated U.S. corn and soybean flows (million metric tons) resulting from increasing Panama Canal tolls and closing the canal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Table 10–Estimated annual reduction in U.S. corn and soybean producer revenues resulting from increased tolls ($ per metric ton) or closing the Panama Canal, by State . . . . . . . . . . . . . . . . . 24

Appendix Table A–Timeline of a partial Panama Canal transit of the M/V Aspilos . . . . . . . . . . . . 30

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List of Photographs

M.V. Aspilos locked in Miraflores first chamber. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . front cover

Pilot overseeing M.V. Aspilos transit through Panama Canal locks . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Two-way traffic at Gaillard Cut . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Widening the Gaillard Cut . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Ship bow in Panama Canal’s Gatun Lock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

M.V. Aspilos in the Gaillard Cut . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Transiting into the 21st Century . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Grain loading in ship hold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Analysis of the shipment of U.S. agriculturalcommodities and products through the PanamaCanal provides vital information on how thecanal affects U.S. agriculture. It also provides aframework to assess potential policy changesresulting from the Panama Canal Treaties of1977, which transferred control of the PanamaCanal from the United States to the Republic ofPanama on Dec. 31, 1999. This analysis coversthe years 1989-98, provides information on thecanal’s history and future from discussions withits users and operators, and includes a discussionon recent research that quantifies the value of thecanal for U.S. agriculture.

A new canal organization superseded thePanama Canal Commission (PCC), the U.S.agency that operated the canal when the treatieswere enacted in 1979, 2 years after the treatieswere signed. As a U.S. government agency, thePCC operated the canal on a nonprofit, break-even basis. Revenues were generated by shiptransits, and the PCC used them to operate,maintain, and invest in the canal. The neworganization, the Panama Canal Authority(PCA), will be an autonomous agency of theGovernment of the Republic of Panama and willoperate as a for-profit organization and instituteits own management structure.

Ships transit the canal to move between theAtlantic and Pacific Oceans. The volume of shiptraffic at the Panama Canal is determined largelyby world economic conditions and global traderoutes between countries and trading regions.Traffic on the global trade routes during themid-1990’s, for instance, expanded considerably,causing oceangoing transits through the canalalso to increase. Between 1989 and 1998, ocean-going ship transits increased 8 percent to

12,924 transits. The volume of cargo transportedthrough the canal by those ships increased 27percent during the same time period to 195.2million metric tons (mmt). The average volumeof cargo carried by a ship increased about 2,200metric tons (mt) to 14,863 mt. Revenues gener-ated by those ship transits increased 65 percentfrom $327.9 million in 1989 to more than$543.0 million in 1998. Both the number of shiptransits and cargo carried through the canal areexpected to increase with expansion in worldtrade through the first decade of the new millen-nium (2001-2010).

U.S. agricultural shipments are important car-goes transported through the canal. In 1998, theymade up 21 percent of the canal cargo volume,69 percent of all agricultural shipments, and 52percent of the total U.S. waterborne export vol-ume transported through the canal. Shipmentsof U.S. grains make up most of the U.S. agricul-tural volume going through the canal. In 1998,grain shipments totaled 34.6 mmt. By 2008,exports of corn, soybeans, and wheat transportedthrough the canal could total 40 mmt—a 16-percent increase from 1998. These shipments areimportant revenue-generating cargoes for thecanal. One metric ton of corn or soybeans trans-ported through the canal generates $1.50 in rev-enue for the canal, while the same metric ton ofgrain generates less than $1 per mt in revenue forU.S. producers of corn and soybeans. If changesin canal management result in increased tolls orclosure of the canal, U.S. grain exports woulddecrease no more than 2 percent while canalrevenues most likely would decrease moresignificantly. If vessels bypass the Panama Canaland sail around the Cape of Good Hope, vesseloperators lose 5 percent on the vessels’ averagedaily revenue. To compensate for the lost daily

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Summary

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revenue, the ocean freight rate to transport grainwould likely increase.

The shipping community will need to watchclosely how the new organization, the PCA,manages and operates the canal. Many in theindustry have indicated that the most importantissues in canal management and operation aresafety, maintenance, tolls, canal services, andcapacity. Highly trained and highly skilledPanamanians operate the canal. The shippingindustry, though, has raised concerns that thePCA might cut critical services and trainingafter 2 or 3 years of operating the canal in aneffort to be profitable. Many in the industry sug-gest that for now they will monitor the canaloperations and evaluate how the new organiza-tion affects its business.

Since opening in 1914, the canal has provided theworld trade and the maritime industry with800,000 vessel transits. The efficiency of thecanal relies on oceangoing ships carrying theworld’s cargo through the canal. The canal’smost important cargo, though, is U.S. grain.Changes in canal policy affect U.S. grain ship-ments through the canal and, as a result, affectthe canal’s revenues and profitability. Anychanges or adjustments in canal policy will haveto be evaluated for their effects on U.S. agricul-tural shipments, which make up the largest traf-fic volume and toll revenues transiting the canal.

The Panama Canal Treaties of 1977, signed bythe governments of the Republic of Panama andthe United States, were fulfilled at noon on Dec.31, 1999.1 At that time, the United States turnedover to Panama the control of the canal that itfinanced, built, and maintained as well as itsmilitary assets—installations, facilities, and land.(See the sidebar on the U.S. military pulloutfrom Panama.) In return, the Republic ofPanama took the helm of a highly efficient andvery lucrative transportation arterial. The 21stcentury begins a new era for Panama. The worldwill be watching, especially how Panama man-ages and operates the canal.

A new canal organization supersedes thePanama Canal Commission (PCC), the U.S.agency operating the canal since the treaties wereenacted in 1979. As a U.S. Government agency,the PCC operated the canal on a nonprofit,break-even basis. The PCC used revenues it gen-erated to operate, maintain, and invest in thecanal. The new organization, the Panama CanalAuthority (PCA), is an autonomous agency ofthe Government of the Republic of Panama. Itwill operate as a for-profit organization and willinstitute its own management structure, withoutinfluence from the Panamanian Government.The President of Panama will appoint 10 mem-bers to the board of directors, with thePanamanian National Assembly approving nineof those members and appointing the tenthmember. Terms of each member will be stag-gered to ensure political independence.

The canal, approximately 80.5 kilometers long(equivalent to approximately 50 miles), shortensthe transit time for vessels carrying cargo andmilitary armaments between the Atlantic andPacific Oceans. Since it opened in 1914, close to800,000 vessels carrying 6.4 billion metric tons(mt) of the world’s waterborne commerce havetransited the Isthmus of Panama, travelingbetween the Atlantic and Pacific Oceans (figure1). Ships transiting the canal are lifted 26 metersfrom sea level through three lock chambers toGatun Lake and then lowered back to sea levelthrough three more lock chambers (appendix).In 1998, cargo transported through the canaltotaled 195.2 million metric tons (mmt), anincrease of 27 percent from 154.1 mmt in 1989(table 1).

1

Introduction

1 The Panama Canal Treaty and the Treaty of the PermanentNeutrality and Operation of the Panama Canal.

Pilot overseeing M.V. Aspilos transit through Panama Canal locks

The volume of traffic at the Panama Canal is afunction of economic conditions around theworld and traffic on the global trade routesbetween countries and trading regions. Traffic onthe global trade routes during the mid-1990’s, forinstance, expanded considerably, causing ocean-going transits through the canal to increase. Asan example, by comparing 1989-91 and 1995-97,ship transits increased 10 percent, averaging1,200 more transits by 1995-97 than during1989-91. In 1997 and 1998, an economic reces-sion affected Asian countries and other majorusers of the canal, causing ship transits to drop4 percent from a peak of 13,539 in 1996 to fewerthan 13,000 in 1998 (table 1).

Ships using the Panama Canal have increasedin size. The PCC measured each ship to assess atoll for the ship’s canal transit. The measurement,the Panama Canal Universal MeasurementSystem (PC/UMS), is a volumetric measure of aship’s cargo-carrying capacity. The larger theship, the larger the PC/UMS, and conversely, thesmaller the ship, the smaller the PC/UMS. Theaverage PC/UMS per transit in 1989 was 15,495,which increased 11 percent to 17,149 in 1998

(table 1). Ships also are transporting more cargothrough the canal. The average oceangoing shipcarried 12,648 mt through the canal in 1989. In1998, the average volume transported on shipstransiting through the canal was 14,863 mt, up18 percent from 1989 (table 1).

U.S. agricultural shipments are cargoes importantto the canal. In 1998, they made up 21 percent ofthe canal cargo volume, 69 percent of all agricul-tural shipments through the canal, and 52 per-cent of the total U.S. export volume transportedthrough the canal (figure 2). Shipments of U.S.grains make up most of the U.S. agriculturalvolume going through the canal. Between 1995and 1998, U.S. grain exports transported throughthe canal averaged 33.4 mmt per year. In 1998,three grains accounted for more than 95 percentof the U.S. grain transported through the canal,corn (two-thirds), soybeans (one-quarter) andwheat (8 percent).

The canal has served global shipping well forthe past 85 years. Its effectiveness as an efficientshortcut between the Atlantic and PacificOceans, for instance, has given U.S. grain exports

2

Figure 1–North and South America and trade routes through Panama

PanamaNorthAmerica

SouthAmerica

PanamaCanal

AtlanticOcean

PacificOcean

Panama CityColon

3

Figure 2–Total U.S. exports, U.S. agricultural exports, and cargo volume transiting the Panama Canal, 1989-98 (million metric tons)

SOURCE: Panama Canal Commission

Table 1–Panama Canal traffic, transits, tolls, cargo, and Panama Canal UniversalMeasurement System (PC/UMS) tonnage, fiscal years 1989-98

Cargo PC/UMS1

Tolls (million net tonnage Average Average Average TransitsYear Transits ($1,000) metric tons) (million) toll ($) cargo PC/UMS per day

19892 11,989 327,851 154.1 185.8 27,346 12,648 15,495 331990 11,941 353,726 159.6 181.6 29,623 13,154 15,208 331991 12,572 372,280 165.3 191.8 29,612 12,941 15,255 3419923 12,454 365,716 161.8 188.5 29,365 12,789 15,137 341993 12,086 398,232 160.2 186.4 32,950 13,048 15,423 331994 12,337 416,803 173.3 194.3 33,785 13,823 15,749 341995 13,459 460,045 193.4 215.4 34,181 14,139 16,001 371996 13,539 483,115 201.2 226.9 35,683 14,629 16,758 3719974 13,043 491,635 192.8 216.9 37,693 14,550 16,628 3619985 12,924 543,036 195.2 221.6 42,018 14,863 17,149 35

1 Panama Canal Universal Measurement System—a volumetric measure of a vessel’s cargo-carrying capacity used for assessingeach vessel transit toll

2 Toll per PC/UMS: Laden = $2.01; Ballast = $1.60; and Displacement = $1.123 New toll per PC/UMS: Laden = $2.21; Ballast = $1.76; and Displacement = $1.234 New toll per PC/UMS: Laden = $2.39; Ballast = $1.90; and Displacement = $1.335 New toll per PC/UMS: Laden = $2.57; Ballast = $2.04; and Displacement = $1.43

SOURCE: Panama Canal Commission, Annual Reports

0

50

100

150

200

250

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Panama Canal Volume Total US Exports US Ag Exports

Car

go

Shi

pm

ents

(mill

ion

met

ric

tons

)

Year

from the U.S. Gulf a competitive advantage inAsia. But that competitive advantage could beaffected if that shortcut becomes more costly.

This report describes the canal’s development,importance, and transition issues of the PanamaCanal to Panamanian control that are most likelyto affect U.S. agriculture. The first issue is man-agement of the canal in the 21st century. Canalmanagement includes setting and collectingtransit tolls and related fees, and the day-to-dayoperations and maintenance of the canal. A sec-ond issue is the capability of the canal to handleincreased traffic from the expansion of worldtrade.

The first two sections of this report discussPanama’s politics and economy and the canal’sdevelopment, importance, and post-treatytransition. The next section evaluates the impor-tance of the canal for U.S. agriculture. The lastsection, the conclusion, includes a discussion ofhow the turnover of the Panama Canal is mostlikely to affect U.S. agriculture in the 21stcentury.

Information and data used in this report camefrom several sources and personal interviews.

As part of the canal treaties, the U.S. military nolonger will maintain installations or a troop forcein Panama after Dec. 31, 1999. The military’spresence in the Panama area dates back tobefore the United States constructed the canal,when it protected U.S. merchant trade lanes.Even during construction, the military suppliedengineers, labor, and security (McCullough).The U.S. military’s Southern Command, head-quartered in Panama, oversaw components ofthe Air Force, Army, Marine Corps, and Navystationed there. Its mission was to assistPanama in defending the canal, command U.S. joint operations, promote democracy and cooperation throughout the Western

Hemisphere, and support the U.S. drug controlstrategy. The Air Force, Army, Marine Corps,and Navy components occupied 5,420 build-ings in an area of 36,000 hectares with func-tional utilities and infrastructure (roads, airstrips,and port areas). The permanently assignedmilitary strength of the Southern Command inPanama numbered 8,500. In October 1997, theSouthern Command headquarters relocated toMiami, FL, as part of the military pullout fromPanama (U.S. Department of Defense). By theend of 1999, all remaining military installations,facilities, and land reverted to the Republicof Panama.

U.S. Military Pullout from Panama

4

The treaties of 1977 and changes in Panama’spolitical landscape will usher in a new era for thePanama Canal. Panamanians elected their firstfemale president, Mireya Moscoso, widow offormer President Arnulfo Arias. She defeatedPresident Martin Torrijos in 1999. PresidentTorrijos’ father deposed Moscoso’s husband inhis last year as president and signed the 1977canal treaties with U.S. President Jimmy Carter.Moscoso was elected as leader of the Arnulfistaparty to continue to promote her late husband’spopulist and nationalist ideas. As president, shereceives the Panama Canal as an autonomousorganization, which the Government of Panamais not to influence. As a candidate and aspresident-elect, she has stated publicly thather administration would not politicize thePanama Canal Authority (PCA—the new canalorganization superseding the Panama CanalCommission) but would encourage an efficient

changeover by introducing national anticorrup-tion and anticronyism measures (Journal ofCommerce, May 1999).

With a population of 2.8 million people, Panamahas a service-oriented economy. In 1997,Panama’s gross domestic product (1982 prices)totaled $6.5 billion, with annual governmentrevenues and expenditures of $2.4 billion and anational debt of $7.26 billion. The PanamaCanal generated more than a half-billion dollarsin revenue in 1998, equivalent to one-quarter oftotal revenues of the Government of Panama(U.S. Department of State, CIA Fact Book, andPanama Canal Commission).

In 1994, Panama began to liberalize its tradepolicy and privatize state-owned enterprises inorder to attract foreign investment. The largestports were privatized in 1997, the Panama Canal

5

Panama’s Politics and Economy

Two-way traffic at Gaillard Cut

railroad was sold in 1998, and the electrical com-pany is currently being privatized. Despite thereform and privatizing efforts by theGovernment of Panama, unemployment is at13.1 percent, and more than one in three personslives below the poverty line. Its labor force totalsa little more than 1 million workers. One-thirdwork in the government sector, and 27 percentwork in the agriculture, hunting, and fishing sec-tor. The Panama Canal employs 9,000 people(98 percent of the canal work force isPanamanian). Panama is a nation largelydependent on imports. For every dollar’s worthof goods Panama exported in 1997, it imported 5dollars in goods (U.S. Department of State, CIAFact Book, and Panama Canal Commission).

The turnover of the Panama Canal is not theonly challenge for the Republic of Panama.Attracting business and industry is necessary toimprove employment and opportunities, raisepersonal income, and stabilize the national debt.Compounding high unemployment and low per-sonal income is the pullout of the U.S. military(See the sidebar on the U.S. military pulloutfrom Panama.), which employed Panamanianson its installations and contributed to the localeconomy.

The new canal organization will operate in a for-profit manner. It may reduce wages and lay offemployees in an effort to reduce costs. Panama’seconomy might endure localized hardships as aresult of the U.S. military pullout and anychanges in the canal operations. In the longterm, the country will most likely depend uponthe canal as an effective attraction for businessand industrial expansion.

6

Development of the Panama Canal

In 1903, the United States entered into the Hay-Bunau-Varilla Treaty with Panama for the perpetual use, occupation, and control of a10-mile-wide piece of land across Panama fromthe Atlantic to the Pacific Oceans to constructand defend a canal. The United States purchasedthe rights to construct a canal through Panamafor $40 million from the French Canal Company(FCC), which had attempted to construct andfinance a sea-level canal, only to fail two decadesafter starting construction in 1880. The UnitedStates paid the Republic of Panama $10 millionand an annual annuity of $250,000 to build anduse the land on which the canal was constructed(McCullough). The annuity gave the UnitedStates the rights to operate the canal in perpetu-ity. The U.S. government needed 10 years and

$387 million to design and construct the canal,which opened in 1914. Since 1903, the UnitedStates has invested $3 billion to modernize andupdate the canal, but has recovered more thantwo-thirds of that investment (Panama CanalCommission).

To construct the canal, the United States had toovercome engineering, sanitation, and organiza-tional challenges. Engineering the canal requiredextensive digging through the ContinentalDivide, building the largest dam at the time,installing enormous canal locks and gates, andobtaining adequate water storage for the systemto function. Disease had been a major problemfor the FCC during its construction attempt.The United States implemented sanitation andinsect-control programs around the Canal Zoneto reduce deaths related to disease. An estimated

7

Panama Canal: Development,Importance, and Post-Treaty Transition

Widening the Gaillard Cut

25,000 people died of disease and accidents dur-ing the entire construction period(McCullough). An extensive organization wasalso required to design the canal, allocate fundsfor construction, coordinate labor, and attend tovisitors (Panama Canal Commission).

The Panama Canal opened to oceangoing vesselson Aug. 15, 1914. Its benefit to world trade wasas a shortcut between the Atlantic and PacificOceans. For the United States, the canal meant aquicker trip by water between New York and SanFrancisco. Before the canal, there were only threefeasible routes: sailing around Cape Horn, a 67-day, 12,000-mile journey; sailing to Panama’snarrowest point between the Atlantic and PacificOceans (the present location of the canal), wherepassengers and cargo were unloaded and trans-ported over the isthmus and the ContinentalDivide to the other ocean, then reloaded onanother ship to complete the journey; or atranscontinental journey across North America.

Since 1914, the United States has operated thecanal, managed the land extending 5 miles oneither side of it (the Canal Zone), and set tollsfor transiting vessels through the Panama CanalCompany—the U.S. organization that operatedthe canal at that time. During the early years, the

Panamanians complained they did not receive afair share of revenues generated by the canal, andthey resented the United States’ operation of thecanal. In 1936, the two nations amended their1903 treaty to increase the annual annuity paidto Panama to $430,000, and the United Statesgave up its right to intervene in Panama andmaintain public order. In 1955, another amend-ment increased the annual annuity to $1.93 mil-lion, limited the U.S. involvement in Panama’sinternal affairs, established a single pay scale forAmericans and Panamanians employed by thePanama Canal Company, and made Spanish anofficial language along with English within theCanal Zone. In 1955, the Panama CanalCompany turned over to the Republic ofPanama the Panama City railroad yards andother properties, valued at $22 million.Seventeen years later, in 1972, the annuity wasadjusted again to $2.1 million, and then again in1973 to $2.33 million (Panama CanalCommission).

Panama had long resented the U.S. control of the Canal Zone and by 1974, the two countriesagreed to negotiate the eventual turnover of the canal to Panama. Three years later, the U.S.Government and the Republic of Panama signedtwo treaties to jointly operate, manage, and defendthe canal over a 20-year period and guaranteethe neutrality of the canal after the turnover.

The treaties were enacted on Oct. 1, 1979. Atthat time, the Panama Canal Commission(PCC), a U.S. Government agency, was formedto replace the Panama Canal Company, to oper-ate and manage canal activities. Revenues thatwere generated by tolls and transit services sup-ported the operation, labor and maintenanceexpenses, and capital investment programs. Therevenue also provided Panama a $10 millionfixed, annual payment, a $10 million inflation-adjusted payment for public services thatPanama provided, an annual percentage of tollrevenues, and a payment of up to $10 million ifrevenues exceeded PCC expenditures in a givenyear (U.S. Department of State). During thetransition period, the PCC replaced Americanstaff, ship pilots, and members of the board ofdirectors with Panamanians trained to operateand manage the canal after the turnover.

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Ship bow in Panama Canal’s Gatun Lock

The canal organization that succeeded the PCCon Dec. 31, 1999, the Panama Canal Authority(PCA), operates autonomously as a for-profitbusiness. As such, the PCA will be able tostreamline, restructure, or expand certain aspectsof canal tolls, operations, and services. Manycritics have expressed concern that as a for-profitventure, the PCA could raise revenues too highthrough increased tolls, eliminate certain impor-tant services, lay off employees, and lower wages,while allowing Panamanian politics to influencecontract and labor negotiations.

Importance of the Panama Canal

The canal’s purpose is to allow vessels of varioustypes and sizes to move between the Atlanticand Pacific Oceans. Bulk ships carry homoge-neous commodities, containerships transportunitized containers loaded with numerous com-modities and products, and tankers carry bulkliquid products. Military vessels, such as battle-ships and submarines, use the canal duringdeployment. Passenger ships carry vacationingtourists, and mariners take their yachts, sailboats,and other personal water craft through the canal.

By allowing vessels to transit between theAtlantic and Pacific Oceans, the Panama Canal

saves time and money for the transport of water-borne goods. For cargo shipped from the U.S.Atlantic or Gulf Coast (U.S. East Coast) to des-tinations in Asia, for instance, the canal savesabout 10 days’ sailing time, savings which areintegral to route selection by shipowners andoperators. The canal is a preferred alternative forshipowners if the average daily revenue of a ves-sel’s transit through the canal is more than anextra 10-day routing. For example, assume that a65,000 deadweight tonne (dwt) dry bulk vesseltransports 52,000 mt of grain from the Gulf ofMexico to Japan via the Panama Canal at afreight rate of $18.75 per mt. Clarkson ResearchStudies of London, England, estimates the ves-sel’s average daily revenue to be $7,336.2 Anextra 10-day sailing reduces the average dailyrevenue of the vessel by 5 percent to $6,975 perday. A Panama Canal transit generates $361.50

9

2 Clarkson Research Studies estimates average daily revenue bysubtracting shipping costs (port costs, bunkers, and canalcharges) from total revenue (the freight rate, dollars permetric ton times cargo tons) then dividing the difference byvoyage days:

{[($18.75 × 52,000) – ($181,530.50 + $242,633.50 +$85,000)] ÷ 63.5} = $7,336.00

Data were obtained from Clarkson Research Studies and theClarkson Research Studies “Shipping Intelligence Weekly,”Issue No. 381, Aug.13,1999, to estimate average daily revenue.

M.V. Aspilos in the Gaillard Cut

more revenue per day for a vessel than the extra10-day sailing schedule. Although the vesselavoids paying the canal toll by sailing around theCape of Good Hope, it requires 15 percent morebunkers and revenue distributed over an addi-tional 10 days. Clarkson Research Studies esti-mate the canal charge to be $85,000. If the goalof the vessel operator were to generate $7,336 indaily revenue by sailing around the Cape ofGood Hope, the required shipping rate wouldhave to increase about 3 percent to $19.26 per mtfrom $18.75 per mt (figure 3). The shipping rateis the shipper’s cost to have the grain transportedto Japan.

Over the past decade, more than 138,000 shipshave transited the canal. In 1998, ship transitswere up 8 percent from 1989 while cargo volumewas up 27 percent. The average ship carried 19percent more cargo in 1998 than in 1989. Vesseltransits were most frequent in 1995 and 1996, atnearly 13,500 each year (table 1).

Ships transit the canal en route to the PacificOcean from the Atlantic or to the Atlantic fromthe Pacific. Since 1989, ships going to the PacificOcean from the Atlantic averaged 52 percent ofall oceangoing transits. In 1998, Pacific-boundtransits totaled 6,511—also more than half of alltransits in that year alone (table 2). The highernumber of Pacific-bound transits reflects theimportance of the canal for particular worldtrade routes. The principal trade routes using thecanal, with percentages of total average transits,are U.S. East Coast (includes U.S. AtlanticCoast, Great Lakes, and Gulf Coast) to the FarEast (44 percent); Europe to the West Coasts ofthe U.S. and Canada (9 percent); and U.S. EastCoast to West Coast South America (9 percent).The volume of Pacific-bound cargo also is morethan the Atlantic-bound cargo. In 1998, morethan 112 mmt of cargo moved through the canalto the Pacific Ocean, 57 percent of all cargotaken through the canal (table 2).

The principal commodities transported throughthe canal, as a percentage of total average cargovolume, include grains (23 percent); petroleumand products (14 percent); and containerizedcargo (13 percent) (Panama Canal Commission).Shipments of agricultural commodities andproducts accounted for 30 percent (58.8 mmt) oftotal cargo volume transiting the canal in 1998,with grain and oilseed shipments totaling 36.1mmt or 61 percent of all agricultural shipments.Grain shipments through the canal peaked at44.2 mmt in 1995 and have averaged 35.3 mmtover the 10-year period between 1989 and 1998.Corn, soybeans, and sorghum have accounted fornearly 90 percent of all grain shipments throughthe canal. During 1989-98, corn shipments madeup 30 percent of all agricultural shipments.Before 1995, grain shipments averaged 32.4 mmtand, since 1995, have averaged 39.6 mmt—a 22-percent increase in size. Though shipmentsdeclined in 1997 with the recession of the Asianeconomies, shipments in 1997 and 1998 were stillhigher annually than any year from 1989 through1994 (table 3).

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Figure 3–Ocean rate comparison from U.S. Gulf to Japan, via Panama Canalversus around the Cape of Good Hope ($ per metric ton, based on a grainshipment of 52,000 metric tons)

SOURCE: Rates estimated using data obtained from ClarksonResearch Studies, “Shipping Intelligence Weekly,” Aug. 13, 1999

Panama Canal Cape of Good Hope

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Shipment Routing$0

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Most agricultural shipments move through thecanal from the Atlantic Ocean to the PacificOcean. Between 1989 and 1998, 70 percent ofthe agricultural shipments through the canalmoved from the Atlantic to the Pacific Ocean(table 3). In 1998, shipments of corn and soy-beans made up 67 percent of total agriculturalshipments destined for the Pacific (table 3).

U.S. agricultural commodities and productsshipped through the canal between 1989 and1998 accounted for 68 percent of all agriculturalshipments and 21 percent of all canal cargovolumes. In 1998, U.S. agricultural shipmentstotaled 40.5 mmt, a 23-percent increase from1989. Agricultural cargo originating from theU.S. East Coast (U.S. Atlantic Coast, GreatLakes, and Gulf Coast) and transiting the canalto the Pacific constitutes 95 percent of all U.S.agricultural shipments, which have increasedsteadily since 1989 and peaked in 1995 and 1996(table 4).

The size of a ship transiting the canal is limitedby the size of each lock chamber. Vessels mustmeasure less than 32.3 meters (m) at the beam(width), 294.1 m in length for containerships and289.6 m in length for other commercial vessels,and 12 m in draft.3 The largest ship capable oftransiting the canal is called a “Panamax.”4 Shipstoo large to transit the canal are called “post-Panamax.” Transits of Panamax vessels are

increasing, representing one-fifth of all transitsin 1983 and one-quarter of all transits in 1988(Bastian). By the mid-1990s, one out of everythree ships was a Panamax transit (PanamaCanal Commission). The average size of a shipin the world oceangoing fleet is increasing andmore ships are being built as post-Panamaxvessels. During the 1980’s, about 92 percent ofthe world cargo fleet could use the PanamaCanal, but by 2000, it was expected that only 82percent would be able to use it (Panama CanalCommission staff ).

Panamax-size ships make a more effectivetransit through the canal by carrying morecargo, but they diminish the efficiency of thecanal because they are limited, by canal policy,to daylight transits, require extra pilots and linehandlers, take longer to traverse a set of locks,and are restricted to single passage through thenarrowest portions of the canal in the GaillardCut. In fact, the lockage of a laden Panamaxvessel requires 40 percent more time than avessel with a beam under 30 m because thenarrowest passageways through the GaillardCut prevent the largest vessels from safelypassing one another (Bastian).

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Table 2–Panama Canal oceangoing transits and cargo (million metric tons) by direction,fiscal years 1989-98

Atlantic to Pacific Pacific to Atlantic Total

Year Transits Cargo Transits Cargo Transits Cargo

1989 6,311 89.7 5,678 64.4 11,989 154.11990 6,274 92.4 5,667 67.2 11,941 159.61991 6,557 101.1 6,015 64.3 12,572 165.41992 6,374 98.4 6,080 63.4 12,454 161.81993 6,212 98.8 5,874 61.5 12,086 160.31994 6,352 104.2 5,985 69.0 12,337 173.21995 6,933 122.8 6,526 70.6 13,459 193.41996 6,902 126.2 6,634 75.0 13,536 201.21997 6,692 117.4 6,351 75.4 13,043 192.81998 6,511 112.0 6,413 83.2 12,924 195.2Average 6,512 106.3 6,122 69.4 12,634 175.7

SOURCE: Panama Canal Commission, Annual Reports

3 Vessel draft is the portion of the vessel submerged below thewater line.

4 PCC classifies ships with beams of more than 30.5 meters asPanamax.

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Table 3–Principal agricultural shipments (million metric tons) via the Panama Canal,fiscal years 1989-98

Commodities 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Total Shipments

Barley 0.2 0.3 0.7 0.2 0.6 0.3 0.6 0.6 0.5 0.3Corn 10.7 14.2 15.3 14.6 16.3 16.2 24.3 24.7 18.4 18.6Oats 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.1 0.1 0.1Rice 0.5 0.7 0.6 0.7 0.7 0.6 0.7 0.8 0.8 1.1Sorghum 2.0 2.1 1.8 2.0 2.1 1.6 1.9 1.5 1.6 1.9Soybeans 5.3 6.3 6.4 7.3 8.0 7.3 8.6 8.8 10.5 10.2Wheat 11.2 6.9 8.1 7.7 5.9 7.8 7.7 6.0 3.3 3.6Oilseeds 0.2 0.2 0.1 0.3 0.3 0.3 0.5 0.4 0.4 0.3Other 0.0 21.0 22.0 22.1 20.8 22.1 25.0 24.9 25.1 22.7Total 30.1 51.7 55.0 55.0 54.7 56.1 69.2 67.7 60.5 58.8

Atlantic to Pacific

Barley 0.0 0.0 0.1 0.1 .070 0.0 0.3 0.2 0.3 0.2Corn 10.6 14.2 15.2 14.6 16.3 16.2 24.2 24.5 17.8 18.2Oats 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.1 0.1Rice 0.2 0.2 0.2 0.1 0.1 0.2 0.3 0.3 0.2 0.7Sorghum 2.0 2.1 1.8 2.0 2.0 1.6 1.9 1.5 1.6 1.9Soybeans 5.3 6.2 6.4 7.3 8.0 7.2 8.6 8.7 10.5 10.2Wheat 10.1 5.5 5.9 5.5 3.8 4.4 5.8 4.3 1.8 1.8Oilseeds 0.0 0.1 0.1 0.2 0.2 0.1 0.2 0.2 0.3 0.2Other 6.0 5.8 7.4 8.3 7.3 8.5 10.3 10.4 10.5 9.0Total 34.1 34.1 37.1 38.2 37.7 38.2 51.7 50.1 43.0 42.2

Pacific to Atlantic

Barley 0.2 0.3 0.6 0.1 0.6 0.2 0.2 0.3 0.2 0.2Corn 0.0 0.0 0.0 0.0 0.1 0.0 0.1 0.2 0.6 0.4Oats 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Rice 0.4 0.4 0.4 0.6 0.6 0.4 0.4 0.5 0.5 0.3Sorghum 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Soybeans 0.1 0.1 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.1Wheat 1.2 1.4 2.2 2.2 2.1 3.4 1.9 1.7 1.5 1.8Oilseeds 0.1 0.1 0.0 0.1 0.1 0.2 0.2 0.2 0.1 0.0Other 14.5 15.3 14.6 13.8 13.5 13.6 14.7 14.5 14.6 13.7Total 16.4 17.6 17.9 16.8 16.9 17.9 17.6 17.5 17.5 16.6

SOURCE: Panama Canal Commission

Table 4–Panama Canal cargo volumes (million metric tons) by U.S. origin coast, total, andagricultural cargoes, fiscal years 1989-98

Origin 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Total ECUS1 64.0 64.5 72.0 69.5 69.5 70.2 84.8 84.5 74.8 70.9Ag ECUS 31.2 31.3 33.9 35.0 35.6 35.3 48.5 47.3 39.8 39.6

Total WCUS 7.2 8.0 8.9 9.6 7.3 8.6 6.9 7.2 6.5 7.2Ag WCUS 1.8 2.2 2.8 2.6 1.8 2.8 1.2 1.2 0.8 0.9

Total US 71.2 72.5 80.9 79.1 76.8 78.8 91.7 91.7 81.3 78.1Ag US 33.0 33.5 36.7 37.6 37.4 38.1 49.7 48.4 40.6 40.5

Note: ECUS is East Coast U.S. and includes U.S. Gulf and Atlantic Coasts, Ag ECUS is agricultural shipments from the ECUS,WCUS is West Coast U.S., and Ag WCUS is agricultural shipments from the WCUS.

SOURCE: Panama Canal Commission

Post-Treaty Transition of thePanama Canal

The canal is an important transportation arteryfor oceangoing vessels and world trade, and theability of the PCA to meet the demand for canalservices will influence trade patterns and growth.This section looks at the PCA, its capacityexpansion efforts, its environmental resources,port and railroad privatization, and world tradeand ocean fleet projections.

Panama Canal Authority

The Panama Legislative Assembly establishedthe Panama Canal Authority to manage, main-tain, use, and conserve water resources of thecanal watershed, and to modernize the canal asa safe and profitable enterprise to serve theRepublic of Panama for the economic develop-ment of the country. The objective of the PCA“is that the canal always remain open to thepeaceful and uninterrupted transit of vesselsfrom all nations of the world, without discrimi-nation…” (Panama Legislative Assembly LawNo. 19, June 11, 1997). A board of 10 directorswill manage the PCA. The President ofPanama appoints one as the chair of the boardof directors with the rank of Minister of State

for Canal Affairs, but the Legislative Assemblyfreely appoints or removes a director. Thepresident appoints the remaining nine direc-tors, with consent of the Cabinet Council andratification by an absolute majority of theLegislative Assembly. Each director serves a9-year term—three are appointed every 3 years(Panama Legislative Assembly Law No. 19,June 11, 1997).

The PCA board of directors appoints, removes,and establishes the salary and benefits of theadministrator, deputy administrator, and theinspector general. The board also determines thevessel admeasurement system and sets tolls,rates, and fees for use of the canal, subject tofinal approval of the Cabinet Council. The direc-tors prepare and approve an annual budget forconsideration by the Cabinet Council and theLegislative Assembly. They also establish canallabor relations and procedures for selection andpromotion, as well as wage scale and benefits,and they determine applicable contracting, sup-ply acquisition, and rendering of appropriateservices. The PCA may expand its operations byengaging in any commercial or industrial activi-ties or services complementing the profitabilityof the canal (Panama Legislative Assembly LawNo. 19, June 11, 1997).

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Transiting into the 21st Century

Actively planning for its management and oper-ation of the canal after Dec. 31, 1999, the PCAannounced in March 1999 that toll rates wouldnot change during the first year of its operationof the canal. The PCA surmised that the PCChad increased tolls sufficiently in previous yearsto generate adequate revenue for canal opera-tions. Since the canal opened in 1914, the tollshave been increased eight times, from 90 centsper PC/UMS to $2.57 per PC/UMS, a 186-percent increase (table 5). They have increasedfive times since 1989, from $2.01 per PC/UMSto $2.57 per PC/UMS in 1998, a 28-percentincrease. Revenues in 1989 totaled about $328million from 11,989 transits. A decade later, rev-enues increased 66 percent to $543 million, with12,924 oceangoing transits (table 1).

Labor and staffing of the canal will be differentunder the PCA. PCC employees had expressedconcern that the PCA might cut wages and posi-tions to reduce costs and improve the profitabil-ity of the canal. In January 1999, the PCAannounced plans to lay off ship pilots and reducefrom two pilots to one the number required toassist a wide-beam vessel transit. The pilots’organization appealed to the PCA and to theinternational maritime community, claiming thatsuch a reduction would compromise safety. Twoship captains confirmed the pilots’ position bysaying that without enough pilots on a ship, thevessel, its crew, cargo, and other vessels are inmore danger (personal contact with ship cap-tains). Laying off experienced pilots also could

reduce the quality of the canal training programif new pilots cannot obtain adequate trainingwith the experienced pilots. Extra pilots on thelargest vessels increase safety and minimize inci-dents (wrecks and collisions with other vessels orcanal structures) for vessels moving through thecanal.

The PCA, in many ways, has proven itself capa-ble of managing the canal even before it tookover the management of the canal. More than 98percent of the employees, including the adminis-trator, are Panamanian. These individuals mostlikely will continue to work the canal.Consequently, the turnover of the canal shouldbe uneventful, with ships transiting in 2000 asships did in 1999. Although several individualsin the maritime community, ship captains, PCCstaff and pilots, ship agents, and others, haveexpressed concern that Panamanian politicsmight affect canal management and operations,these individuals believe that 2-3 years beyondthe turnover might reveal how well the PCA willoperate the canal over time.

World Trade and the Ocean Fleet Projections

World trade volume through 2002 is expected toincrease 3-4 percent annually, while the worldfleet of oceangoing vessels is forecast to increase1-2 percent annually (USDOT- MARAD/USCG). Trade carried by bulk ships is expectedto increase 3-4 percent, while the dry bulk fleet isexpected to expand by 1-2 percent (USDOT-

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Table 5–Historical toll rates (in U.S. dollars) per Panama Canal Universal MeasurementSystem net ton (PC/UMS), 1914-present

Average Percentage

Date Laden Ballast Displacement Increase

Before July 8, 1974 0.90 0.72 0.50 --July 8, 1974 1.08 0.86 0.60 19.7November 18, 1976 1.29 1.03 0.72 19.5October 1, 1979 1.67 1.33 0.93 29.3March 12, 1983 1.83 1.46 1.02 9.8October 1, 1989 2.01 1.60 1.12 9.8October 1, 1992 2.21 1.76 1.23 9.9January 1, 1997 2.39 1.90 1.33 8.2January 1, 1998 2.57 2.04 1.43 7.5

SOURCE: Panama Canal Commission

MARAD/USCG). Both the containership fleetand containerized cargo will likely increase 8-10percent annually to 2002, as shown in table 6(USDOT-MARAD/USCG). The PCC expectsits traffic to grow at the same rate as the growthin world trade by each vessel type (discussionwith Panama Canal staff ).

Most vessels now built for the world’s containerfleet are too large for the canal. These larger ves-sels are built to carry more containers and makefewer port calls. In practical terms, larger shipsmean the operating costs of a vessel can be dis-tributed across more containers. These largerships, however, require ports with deeper draftsand more shoreside services, and are in portlonger to unload and load-back containers. Assuch, these ships are scheduled to call on fewerports and use alternative inland modes to trans-port containers to final position, rather thantransit through the Panama Canal (see the side-bar on U.S. alternatives to the Panama Canal).

Expanding the Canal

To keep up with the growth in the worldseaborne trade and the larger ships being built,the PCC has embarked upon a capital invest-ment program to expand capacity for expectedincreases in vessel traffic. The efficiency of canaloperation is measured two ways: ship transits perday and the average canal water time5 (CWT) ofa vessel. The maximum allowable capacity of thecanal is 37 to 42 ship transits per day (PanamaCanal Commission). Daily ship transits indicatethe effectiveness of ship lockage and vessel speedthrough the canal waters. The benchmark is a24-hour CWT (Panama Canal Commission).A lower CWT gains efficiency, while an increaseis a loss in efficiency.

The CWT can fluctuate with increased trafficvolumes, larger ships transiting the canal, andmechanical delays operating the locks. But astransit traffic increases, the CWT will mostlikely continue to increase—pressuring the PCAto expand the canal while maintaining its presentsystem. In order to finance future canal expan-sion, the PCA may increase tolls or obtainfinancing through capital loans. In the past, thePCC financed capital improvement projectsthrough toll-generated revenues.

The transit capacity of the canal, under normaloperating conditions, is a function of vessel sizes,lock outages, and direction of transits. Panamaxvessels increase CWT because they are limitedto daylight transits and one-way passage throughthe Gaillard Cut and take longer to traverse a setof locks. During daylight hours, the number ofship transits ranges from 10 to 15 per day,depending upon ship sizes. Daylight transitsmake up less than half of the canal’s maximumdaily capacity. Lock outages and interruptions inthe canal also increase CWT (Panama CanalCommission staff ).

The average size of a vessel in the world fleetand those transiting the canal has increased—with wider beams (the vessel’s width), longerlengths, and deeper drafts. For example, 25 per-cent of the world fleet is currently Panamax insize, while by 2010, more than one-third of thevessels are expected to be Panamax (PanamaCanal Commission staff ).

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Table 6–World trade growth compared tofleet growth, 1998-2002

Trade FleetGrowth Growth

Vessel/Trade (percent) (percent)

Dry Bulk 3-4 1-2Tanker 2-3 1-2Product 4-5 3-4Crude 1-2 0-1General Cargo 6-7 2-3Container 8-10 8-10Average 3-4 1-2

SOURCE: USDOT-MARAD/USCG

5 Canal water time (CWT) is a time measurement of a vesselfrom the moment it is ready to transit the canal until it exitscanal waters. The canal waters include those areas beyond thecanal locks on the Atlantic and Pacific Oceans and includethe breakwater or anchorage areas. Once a vessel enters thefirst set of locks on either side of the canal, the transit timeaverages 9 hours. The time waiting to enter the first set oflocks increases the CWT.

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Waterborne cargo exported from or imported tothe United States does not require an all-waterroute to reach a final market position. TheUnited States has an intermodal system thatexpands the routing selection for cargoshipped. For instance, larger ships that trans-port containers to the United States call on twoor three ports for unloading and loading con-tainers. The larger ships carrying containersfrom an Asian country to the U.S. East Coastwould be too large for the Panama Canal. Theships would call on a U.S. West Coast port,where the containers are unloaded and thentransferred onto rail cars for an intermodaldelivery across the United States to final mar-kets. This service, called the “land-bridge,”eliminates an all-water delivery of a containerand avoids use of the Panama Canal.Containers land-bridged across the UnitedStates from the U.S. West Coast to New York,for instance, save about 7 days and $600 to$2,600, depending on the cargo mix, instead ofusing the Panama Canal (“Lloyd’s ShippingEconomist,” September 1998).

The land-bridge method has served U.S. tradeefficiently, but its effectiveness as an alternativeto the canal is constrained by increaseddemand for domestic inland transportation andlimited rail capacity. Demands for rail servicefluctuate with the economy of the United Statesand the world. The ability of railroads to offer abeneficial service requires nearly flawless per-formance from moving trains. In late 1997, forinstance, the Union Pacific Railroad experi-enced significant rail service problems mergingwith the Southern Pacific, while making the twosystems compatible. The incompatibilities of

the two railroads nearly closed the western railnetwork. As a result, grain trains and inter-modal rail service moved slowly, severely ham-pering rail service (Norton and Brennan). Thatincident, coupled with a large volume of con-tainerized imports at the time, slowed downWest Coast port operations. In response, con-tainership companies that had moved cargofrom west to east across the United Statesused smaller vessels and used the canal as aworkable alternative to move cargo.

U.S. grain exporters also have several trans-portation options. Most grain produced in theUnited States and destined for export movesby barge to elevators in the U.S. Gulf (Eriksen,Norton, and Bertels, March 1999). Elevators inthe Pacific Northwest (PNW) on the ColumbiaRiver and on Puget Sound, on the St. LawrenceSeaway, or the Atlantic Coast also have grainexporting facilities. Exports of corn through thePNW, for example, first move by rail to PNWelevators before being loaded onto a bulk ves-sel. The vessel then transports that grain to itsultimate market destination, mostly Far Easternmarkets, and avoids the Panama Canal. Graingrown in the Western Corn Belt and thenexported most commonly is shipped throughPNW elevators, while grain produced in theMidwest, within economical trucking distancesof navigational waterways, moves by barge toGulf elevators. Any problems on the U.S. inlandriver system will cause domestic shipments ofgrain exports to shift to the PNW or, conversely,with problems with rail service for grain ship-ments to the PNW, that grain will move towardthe river for delivery, to provide an efficientalternative to other competitive routes.

U.S. Alternatives to the Panama Canal

By 2005, a major capital improvement programto increase capacity, costing nearly $1 billion,should be completed, and the sustainable operat-ing capacity will increase 20 percent. The pro-gram includes widening the Gaillard Cut,augmenting the tugboat fleet, adding locomo-tives, modernizing the vessel traffic managementsystem, converting the miter gates and risingstem valves to hydraulics, and automating themachinery controls. Each of these improvementsis described in the Panama Canal capitalimprovement program sidebar.

Environmental Resources

As traffic at the canal reaches capacity and tran-sit time increases, ship operators and owners willconsider alternate maritime routes. To keep thecanal competitive with other routes, the PCChas conducted several studies to expand thecanal’s capacity beyond just widening theGaillard Cut. Once the widening is complete,Panamax vessels will be able to pass each otherthroughout the canal waters, although ships ofany size and type still will have to wait throughthe longer lockage times of Panamax vessels. ThePCC will have to consider lock expansion or theconstruction of new locks in the future.

The challenge of increasing lock sizes or con-structing another set of locks is having an ade-quate water supply to assist ships through thecanal. Each ship transit uses 53 million gallonsof fresh water from the canal watershed; i.e.,Gatun Lake. Rain water keeps the watershedfull. However, in 1998, El Nino brought adrought to Panama, lowering Gatun Lake’swater levels. As a result, the PCC restricted thedraft of vessels transiting the canal to 11 m. Therestriction limited the amount of cargo loadedon Panamax ships and cut the daily revenues ofthose ships. Consequently, heavily laden vesselsbypassed the canal and steamed around the Capeof Good Hope.6 Sailing around the Cape ofGood Hope added 10 days and extra bunkers tocomplete the trip, but the vessels transported fullshipments of cargo (Eriksen, May 1999).

The PCC eased the draft restrictions as much aspossible by implementing water-saving tech-niques. The canal has an adequate water supplyin its watershed to service current traffic levels.Adding locks or expanding current locks, how-ever, will require additional water sources tomaintain safe water levels throughout the canal.

Three plans have been proposed to expand thecanal’s capacity to accommodate vessels up to150,000 dwt, and each plan requires significantwater volumes. One project would add a third setof locks at each lock site. Another project pro-poses making a sea-level canal through Panama,and the third project would involve constructinghigh-rise locks for the larger vessels (personalcommunication with PCC staff ).

To expand canal capacity could take up to twodecades and several billion dollars. The PCCcontinues to study world trade patterns andtrends to determine the likely growth patternsand best expansion plan for the canal (personalcommunication with PCC staff ).

17

6 The Cape of Good Hope is the southern tip of Africa, wherethe Atlantic and Indian oceans meet.

18

Gaillard Cut. It took more than 20 years to dig,blast, and remove a mountain of rock and soilto make a “ditch” across the ContinentalDivide, known as the Gaillard Cut, the narrow-est passage in the Canal Zone. The originalwidth of the cut was 91 m and later wasincreased to 152 m. The planned programincreases the width to 192 m in the straightsections and to 223 m at the curves. This proj-ect, estimated to cost $218.7 million, will becompleted by 2002.

Widening the Gaillard Cut, which is nearly 12.6kilometers (km) long, will permit the safe two-way passage of wide-beam vessels. In May1999, the PCC began testing two-way passageof wide-beam ships and, in June 1999, double-passage began through the cut. The dry exca-vation of the cut (above water) is 90 percentcomplete, while the below-water rock blastingis 85 percent complete and the dredging (belowwater) is 53 percent complete.

Locks Machinery Conversion and ControlsSystem. The mechanical systems at each set ofthe locks date from 1914, and these aging com-ponents require significant maintenance. ThePCC began modernizing them by convertingthe systems to hydraulics and programmablecontrollers in 1998. The total cost of theimprovements, expected to be completed by2003, will exceed $22 million.

Panama Canal Locomotives. Integral to movingships through each set of locks are the canallocomotives, which are located on both sidesof a lock lane and run on tracks. They assist bytowing, braking, and keeping the vesselssecure while in the lock structures. Cables from

each locomotive attach to a vessel to tow it. Upto eight locomotives might be used to tow avessel, four on each side.

The current canal locomotive fleet totals 82units, and many of them were built before 1965.By 2002, the PCC plans to increase its locomo-tive fleet to 108 units, at a cost of $93.7 million.The new, faster units will have larger tractionmotors.

Communication, Traffic, and NavigationSystem. The PCC is implementing an advancedtraffic control system to manage vessel trafficthrough the canal. This system will allow canaloperators to see ships as they move by using asatellite global positioning system (GPS). Thesystem, which costs more than $22 million,was put into use in July 1999. Another newlyimplemented computer system will have real-time, up-to-date information, also using GPSfor canal operations and for pilots aboard ves-sels, using one central computer. It will trackvessel location and speed, available for displayto allow operators to make more informed deci-sions. For example, the vessel display will allowship pilots to see the location of other vesselsin the canal waters and allow them to coordi-nate safer and more efficient vessel transits.

Panama Canal Tugboat Improvement Project.Tugboats assist vessels through the canal andare available for emergency response. The cur-rent fleet supports the present level of dailycanal traffic, but increases in vessel traffic willrequire additional tugs. The PCC is updating itsfleet of 20 tugboats to handle the increases invessel traffic. By 2002, the fleet will increase byfour new tugboats at a cost of $33.3 million.

Panama Canal Capital Improvement Program

Port and Rail Privatization

Panama’s plan to modernize and increase capac-ity is not limited to the canal. It also is expand-ing and modernizing its ports and railroadsystem (see the Panama ports and rail sidebar).Projects at Panama’s ports allow the largest con-tainerships to use Panama as a vital transship-ment point for the world container trades. Theports are located near the entrances of thePanama Canal, at Balboa on the Pacific and atColon on the Atlantic. A rail line runs nearlyparallel to the canal between the ports and isscheduled for reconstruction as a trans-isthmiandouble-stack container service. This rail servicecould minimize the need for vessels to transit thecanal and, in effect, increase canal capacity forother ship transits.

A transshipment service would allow containerlines that transit the Panama Canal to offerflexible worldwide shipping alternatives. Forinstance, vessels using the canal often wait

several hours in canal waters before their transit.Ship companies are using the ports located nearthe canal entrances to discharge containers,which are transshipped onto other vessels forother foreign destinations. This service permitsa vessel to efficiently use its time waiting for atransit and allows the shipping line to expand itsservice options for its customers. Most vesselsthat currently transship containers in Panamaalso transit the canal. Containerships built todayare too large to transit the Panama Canal andgenerally use round-the-world services to avoidPanama altogether or use Panama for transship-ment services. Once the rail line is in service,the largest containerships could call on Panamafor transshipping containers across the isthmus,using the double-stack rail service as an alterna-tive to the canal and the U.S. land-bridge system.Panama’s ports and rail will provide a trans-isthmian service, giving Panama an advantage in the container trade business while enhancingthe canal’s capacity.

19

20

Ports. The Panama Ports Company (PPC) pur-chased operating concessions for the ports ofBalboa and Cristobal, while the ManzanilloInternational Terminal, Panama S.A. (MIT), andthe Colon Container Terminal, S.A. (CCT) pur-chased concessions at the port of Colon. Eachconcession is a joint venture between aPanamanian business and a foreign affiliate.The PPC is a subsidiary of China’s HutchisonPort Holding, and MIT is operated byStevedoring Services of America (SSA)Panama, Inc., affiliated with the Seattle-basedSSA and the Motta and Heilbron families ofPanama. The CCT is affiliated with EvergreenInternational S.A., Panama, and Taiwan’sEvergreen Group. Each concession allows therespective port operator to invest in terminalrehabilitation and expansion.

The terminal construction and modernizationprogram at PPC’s Balboa facility includes 12“super post- Panamax” quay cranes, capableof servicing the largest containerships beingbuilt, 1,500 m of deep-water quay, 50 hectaresof container storage, and 28 rubber-tired gantrycranes. This program will allow the PPC to han-dle more than 1.5 million 20-foot-equivalentcontainers (TEU’s) annually. The modernizationprogram also includes facilities for break- bulkcargo. The PPC’s Cristobal terminal’s updatingwill include two Panamax quay cranes (capableof servicing Panamax vessels), new rubber-tiredgantry cranes, and a new harbor crane. Annualcontainer capacity at PPC’s Cristobal terminalmight exceed 300,000 TEU’s (Troetsch).

The initial modernization and constructionphases at port facilities operated by MIT andCCT at Colon were completed in 1998, but after2000, both terminal operators will expand theirterminals again (Urriola Tam, McGivern, andRomero). MIT provides terminal services to 19shipping lines and handles more than 1 millionTEU’s.

Panama Canal Railway Company (PCRC). A76.6 km railroad crosses the Panamanian isth-mus, connecting the Atlantic and PacificOceans. The PCRC will begin rehabilitation andreconstruction of the 143-year-old rail line dur-ing 2000. It will complement the canal and pro-vide an efficient container transshipmentservice between the oceans. The PCRC antici-pates moving 75,000 containers in its first fullyear of service and expanding to 400,000 con-tainers per year with 20 trains daily.

The PCRC formed in 1998 as a joint venturebetween the Kansas City Southern Railway ofKansas City, MO, and Mi-Jack Products, Inc. ofHazelcrest, IL. The Government of Panamaawarded the joint venture an exclusive 25-yearconcession to operate the railway. The PCRCwill invest about $80 million to rehabilitate therailway, construct terminals, and purchase ter-minal equipment (http://www.kcsi.com/pcrc.html, Panama Canal Commission, andpersonal communication with PCC staff).

Panama Ports and Rail

U.S. agricultural products are traded competi-tively throughout the world. Most U.S. agricul-tural exports have consisted of grain andoilseeds, exported from several U.S. port regions,including the U.S. Gulf (Gulf ), the PacificNorthwest (PNW), Atlantic Coast, or the St.Lawrence Seaway. Grain exported from thoselocations can move there by barge, rail, or truckfrom inland grain production areas. U.S. grainand oilseed production totaled 401 mmt in 1997-98, with 24 percent (97 mmt) of it exported(USDA-NASS). Most of those exports wereshipped from elevators in the Gulf (65 percent)or in the PNW (23 percent) (USDA-FGIS/GIPSA). Corn, soybeans, and wheat make upmost grain exports. Corn and soybeans areexported predominantly from the Gulf, whilewheat is exported mainly from the Gulf andPNW. Once at the elevators, the grain is loadedonto bulk oceangoing vessels for transportworldwide. The predominant markets for U.S.grain are countries throughout Asia, with Japanreceiving one-fifth of all U.S. grain exports.

The Panama Canal allows U.S. agricultural com-modities to be traded competitively throughoutthe world. It offers significant advantages forU.S. corn and soybean exporters, especially indelivering grain and oilseeds to Asia. For exam-ple, in 1998, 51 percent of all grain inspected forexport from the Gulf went through the PanamaCanal, more than 33 mmt (table 7) (USDA-FGIS/GIPSA). Corn and soybeans from theUnited States make up more than four-fifths ofthe world’s grain shipped through the PanamaCanal. In 1998, about 66 percent of the corninspected for export from the Gulf went throughthe canal, and of those shipments, 50 percentwent to Japan. Two-thirds of Japan’s U.S. cornimports move through the Panama Canal.

Agricultural exports through 2008 are forecast toincrease by 39 percent to 138 mmt from 99 mmtin 1998 (USDA-WAOB). If that forecast holds,and assuming grain exports through the canalfrom the Gulf remain constant, grain transportedthrough the Panama Canal will total approxi-mately 40 mmt, a 16-percent increase from 1998(table 8).

Future expansion in U.S. grain exports from theGulf with delivery through the Panama Canalwill also depend on the management and opera-tion decisions of the PCA, which has a mandateto operate the canal as a profitable venture. If thePCA raises more revenue through increasedtolls, U.S. agricultural shipments will be mostaffected (personal communication with PCC

21

U.S. Agriculture and the Panama Canal

Grain loading in ship hold

staff ). USDA’s Agricultural Marketing Serviceconducted a study with Texas A&M University’sDepartment of Agricultural Economics to evalu-ate the effect of increased Panama Canal tolls onU.S. grain exports. The report concludes thatincreased tolls would reduce grain exports via theGulf, increase exports via PNW ports, reducequantities transiting the canal, and increase ship-ments around the Cape of Good Hope to EastAsia. Total U.S. corn and soybean exports,though, would decline no less than 2 percent ifthe canal were closed.

The study, “The Panama Canal and Its Effect on the Competitiveness of the United States inInternational Grain/Oilseed Markets,” estimated

how canal management and canal performanceaffect corn and soybean exports. It developedtwo scenarios to quantify the effects. The firstscenario evaluated incremental increases in thetoll rate, and the second scenario evaluated theeffects of closing the canal. The results wereobtained using a spatial equilibrium model.

Under the first scenario, toll rates were raisedincrementally from a base $1.50 per mt up to$5.50 per mt. In the base model, total U.S. cornand soybean exports were estimated at 68.8 mmtwith about 72 percent of the volume routedthrough Gulf elevators, 16 percent throughPNW elevators, and the remaining 12 percentthrough other port ranges. Fifty-four percent ofthe corn and soybean exports routed through theGulf went through the Panama Canal, as shownin table 9 and figure 4.

If toll rates were increased by $1 to $2.50 per mtunder this scenario, total U.S. corn and soybeanexports would be decreased 0.6 percent to 68.4mmt. Exports through the Gulf decreased 2percent to 48.3 mmt, while shipments throughthe PNW increased 6 percent to 11.7 mmt.Shipments through the Panama Canal decreased8 percent to 24.2 mmt. If tolls were increased$4 to $5.50 per mt, total U.S. corn and soybeanexports would decrease 1 percent to 68.0 mmt.Gulf shipments decreased 11 percent to 43.7mmt, and shipments through the canal decreased86 percent to 3.7 mmt. Eighty-nine percent ofthe Gulf ’s (4.9 mmt) lost volume moved throughPNW elevators, which increased volume atPNW elevators 44 percent to 15.9 mmt. Fifty-seven percent of the lost canal volume (22.6mmt) then moved around the Cape of GoodHope (table 9 and figure 4).

22

Table 7–Estimated U.S. grain inspections (million metric tons) for export transiting thePanama Canal, 1989-98

Grain 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Corn 10.8 13.6 13.3 15.3 15.5 17.4 26.0 23.2 16.7 21.8Soybeans 5.1 5.2 6.2 6.8 7.4 6.0 7.6 9.8 9.5 8.9Wheat 9.8 5.3 6.7 4.9 4.8 3.2 5.7 3.7 1.7 2.7Other 2.0 2.1 1.4 1.4 1.6 1.7 1.9 1.7 1.9 1.2Total 27.7 26.2 27.6 28.4 29.3 28.4 41.2 38.4 29.8 34.6

SOURCE: USDA-FGIS/GIPSA

Table 8–Projected U.S. Gulf grain exports(million metric tons) using the PanamaCanal to 2008

Year Corn Soybeans Wheat Total

1997 16.7 7.3 1.7 25.71998 23.4 7.7 2.8 33.91999 17.5 7.5 4.7 29.72000 19.0 7.7 5.0 31.72001 19.7 7.9 5.0 32.62002 20.2 7.7 5.2 33.12003 21.3 7.7 5.3 34.32004 21.9 7.9 5.4 35.22005 22.7 7.9 5.5 36.12006 23.4 8.2 5.6 37.22007 23.9 8.4 5.8 38.12008 24.6 8.7 6.0 39.3

Note: Projections were determined by applying the averagevolume of grain inspections for export from the Gulf (1989-98)and average volume of inspections estimated to transit thePanama Canal to the World Agricultural Outlook Board baselineprojections, 1997 to 2008.

23

Figure 4–Estimated U.S. corn and soybean flows (million metric tons) resulting fromincreasing Panama Canal tolls and closing the canal

Table 9–Estimated U.S. corn and soybean flows (million metric tons) resulting fromincreasing Panama Canal tolls and closing the canal

$2.50/ton $3.50/ton $4.50/ton $5.50/ton Routing of Base toll ($1 % toll ($2 % toll ($3 % toll ($4 % Canal %

U.S. Exports Quantities increase) change increase) change increase) change increase) change close change

Gulf 49.2 48.3 (1.8) 46.2 (6.1) 43.3 (12.0) 43.7 (11.2) 41.4 (15.9)

PNW 11.0 11.7 6.4 13.8 25.5 16.3 48.2 15.9 44.5 17.8 61.8

Other 8.6 8.5 (1.2) 8.3 (3.5) 8.2 (4.7) 8.3 (3.5) 8.6 0.0

Total 68.8 68.4 (0.6) 68.3 (0.7) 67.9 (1.3) 68.0 (1.2) 67.7 (1.6)

Panama Canal 26.3 24.2 (8.0) 17.0 (35.4) 7.3 (72.2) 3.7 (85.9) 0.0 (100.0)

Cape of Good Hope 0.0 0.0 1.7 ∞ 8.9 ∞ 12.9 ∞ 12.5 ∞

SOURCE: Fuller, Stephen W., Luis Fellin, and Ken Eriksen. “The Panama Canal and Its Effect on the Competitiveness of the UnitedStates in International Grain/Oilseed Markets.” College Station, TX: Texas Agricultural Market Research Center Report, Departmentof Agricultural Economics, Texas A&M University. TAMRC International Market Report No. IM 1-99, June 1999

SOURCE: Fuller, Stephen W., Luis Fellin, and Ken Eriksen. “The Panama Canal and Its Effect on the Competitiveness of the UnitedStates in International Grain/Oilseed Markets.” College Station, TX: Texas Agricultural Market Research Center Report, Departmentof Agricultural Economics, Texas A&M University. TAMRC International Market Report No. IM 1-99, June 1999

Gulf PNW

Co

rn a

nd s

oyb

ean

flow

s (m

illio

n m

etri

c to

ns)

Panama Canal toll increases ($ per mt)

Other Panama Canal Cape of Good Hope

0

10

20

30

40

50

1.50 (base) 2.50 3.50 4.50 5.50 Closed

If the canal were closed, total U.S. corn and soy-bean exports would be decreased less than 2 per-cent, but the distribution of the shipments wasaltered significantly. Shipments via the Gulfdecreased 16 percent while shipments via thePNW increased 62 percent. Thirty percent ofthe exports via the Gulf were shipped around theCape of Good Hope (table 9 and figure 4).

Changes in tolls or canal operations affect notonly shipments, but also producer revenues.Increasing the toll $1 per mt to $2.50 per mtdecreased corn and soybean producer revenues$95.6 million per year while increasing the toll$4 per mt to $5.50 per mt decreased revenuesby $247.6 million. Under a canal-closed sce-nario, producer revenues decreased $303.6 mil-lion per year (table 10). The decrease in revenuefrom closing the canal represents 99 cents permt, or 3 cents per bushel of the corn and soy-beans produced in the United States in 1997-98

(USDA-NASS). Changes in the toll or shuttingdown the canal most affected corn and soybeanproducer revenues in Illinois. A $1 toll increasedecreased Illinois producer revenues $23.1 mil-lion per year, while a $4 increase reduced rev-enues $63.8 million, and closing the canalreduced revenues $76.0 million (table 10).

U.S. grain and oilseed shipments are importantrevenue-generating cargoes transported throughthe Panama Canal. Increases in tolls or closingof the canal would affect U.S. grain exports byno more than 2 percent while canal revenueswould decrease significantly. The distribution ofU.S. grain and oilseed exports shifted towardEurope and Africa from the Gulf, with ship-ments to Asia transported from the PNW andaround the Cape of Good Hope. Total producerrevenues from corn and soybeans decreased lessthan $1 per mt, or less than 3 cents a bushelproduced.

24

Table 10–Estimated annual reduction in U.S. corn and soybean producer revenuesresulting from increased tolls ($ per metric ton) or closing the Panama Canal, by State

($1 increase) ($2 increase) ($3 increase) ($4 increase)State $2.50/ton toll $3.50/ton toll $4.50/ton toll $5.50/ton toll Canal close

Decrease in producer revenues ($ millions)Arkansas 2.7 3.9 4.3 4.8 8.3Iowa 14.5 19.8 26.1 26.6 33.5Illinois 23.1 45.3 63.6 63.8 76.0Indiana 12.2 25.3 35.5 35.6 42.3Michigan 2.1 5.2 7.7 7.9 8.4Minnesota 9.9 20.3 27.6 28.2 31.9Ohio 6.3 14.9 20.9 21.9 26.7Other States 24.8 41.2 56.2 58.8 76.5Total 95.6 175.9 241.9 247.6 303.6

SOURCE: Fuller, Stephen W., Luis Fellin, and Ken Eriksen. “The Panama Canal and Its Effect on the Competitiveness of the UnitedStates in International Grain/Oilseed Markets.” College Station, TX: Texas Agricultural Market Research Center Report, Departmentof Agricultural Economics, Texas A&M University. TAMRC International Market Report No. IM 1-99, June 1999

Many vessel owners, operators, shippers, andusers of the Panama Canal have indicated thatthe transfer of the canal to Panamanian controlcould lead to a reduction in service and safetyand higher tolls, although most anticipate thatthe PCA’s first 2-3 years should be smooth.

The PCA inherits an integrated staff ofPanamanians and Americans that is well-trainedand that has managed and operated the canalefficiently and effectively for several years. Thecanal itself has served world trade adequately for85 years with 800,000 vessel transits. Yet, theshipping community has many questions aboutthe long-run credibility of the PCA, whichaffects their shipping operations. For instance,questions the maritime community asks include:Will the PCA maximize revenues and profitsthrough toll increases? Will the PCA discon-tinue or cut important canal services? How willthe PCA finance future capital investment pro-grams to expand the capacity of the canal andincrease its operations for larger vessels? With noU.S. military presence in Panama, who will pro-tect the canal and ensure the Canal Zoneremains neutral? How will Panamanian politicsinfluence canal operations? The shipping com-munity also wonders whether bureaucracy willimpede vessel transits and canal safety, mainte-nance, and investment. Most of these questions,though, do not have immediate answers. ThePCA has answered at least one of them by indi-cating that tolls will not be raised in its first yearof operating and controlling the canal. For themoment, the shipping community has adopted await-and-see approach. The PCA may take 5-10years to identify and incorporate an operatingphilosophy to make the canal profitable.

Shipments of U.S. grain and oilseed exportsmove through the canal to destinations through-out the world. The canal relies on those ship-ments for about 21 percent of its cargo volume. Ifthe canal were to become inoperable or toll rateswere increased substantially, U.S. agriculturalexports would not have to use the canal to get tointernational markets. Alternative markets wouldopen up for those shipments; otherwise, grainand oilseeds would be exported from other U.S.export positions or around the Cape of GoodHope. Transporting grain around the Cape ofGood Hope increases the transport cost to ship-pers 3 percent. The value of the canal to U.S.corn and soybean producers is less than $1 permt, less than 3 cents a bushel. Yet, a metric tonof grain transiting the canal generates $1.50 forthe canal.

The canal relies on oceangoing traffic transitscarrying the world’s cargo. Its most importantcargo, though, is U.S. grain. Policies affectingU.S. grain shipments via the canal affect its rev-enues and profitability.

25

Conclusion

Information on how grain and oilseeds are trans-ported into the world market through thePanama Canal is discussed in this appendix. Thediscussion is specific to grain shipments originat-ing from the U.S. Gulf to Japan, the largestimporter of U.S. grain.

The world trade in grain and oilseed commodi-ties is highly competitive and relies on an effec-tive and efficient transport system to move thosecommodities to a final market position. Factorsthat influence the export of grain and oilseedsinclude commodity price, quality and availability,and transport costs. Exporters in the UnitedStates offer sufficient quantities of high-qualitygrain at a competitive world price. The U.S.transport system allows grain; e.g. corn, to besold from two predominant export positions:export elevators located in the U.S. Gulf and thePacific Northwest (PNW). Nearly two-thirds ofall export grain is shipped from the Gulf andanother one-fifth from the PNW.

Corn production is concentrated in 10Midwestern States (Illinois, Indiana, Iowa,Kansas, Minnesota, Missouri, Nebraska, Ohio,South Dakota, and Wisconsin). Except forNebraska, Kansas, and South Dakota, each Stateborders the navigable Illinois, Mississippi, andOhio Rivers. Corn sold to the export marketfrom these States moves predominantly to therivers and is loaded onto barges. The grain thenmoves down the rivers to the lower portion ofthe Mississippi River to export elevators in theNew Orleans area. The corn is unloaded andstored until it is loaded onto an oceangoing ves-sel, which transports the grain to its finaldestination.

U.S. grain exports to Asian markets move pre-dominantly through Gulf ports. In 1998, 65 per-cent of the grain destined for Asian marketsmoved through the Gulf. For example, Japanimported 38 percent of U.S. corn exports in1998, and 76 percent of that corn was shippedfrom the Gulf. Grain shipped to Japan (or anyAsian market) from the Gulf is shipped throughthe Panama Canal. Forty-three percent of allgrain exported from the Gulf ships through thePanama Canal to Asia, Mexico, and SouthAmerican countries.

A shipment of grain from New Orleans toJapan moves on vessels capable of transiting thePanama Canal. The vessel has to fit througheach of the six lock chambers of the canal, whichlimits vessels to 32 m at the beam (width) and290 m in length. The maximum draft of 12 mthrough the Panama Canal also restricts thevolume of grain that can be loaded onto a vesselto less than 60,000 mt because 2,000 mt of grainequals one-third of a meter in draft. For a60,000-mt shipment, the grain adds 9 meters tothe ship’s draft. The remaining 3 meters of draftallow for the ballast of the vessel, its ship stores,and bunkers.

Once the vessel is loaded in New Orleans, a shipagent coordinates the tug assist, pilot, linesman,final sale transactions, and cargo paperworkbefore the ship moves down the MississippiRiver toward the Gulf of Mexico (Ricard). Atthat time, the captain of the vessel will contactthe Panama Canal Commission (PCC) VesselTraffic Control Center (TCC) and a Panamaship agent with an estimated time of arrival.Once a ship is under full steam, about 13 knotsin the Gulf of Mexico, it needs about 4 days totravel the 2,324 km distance to Panama Canal

27

AppendixShipping a U.S. Grain Cargo Through the Panama Canal

28

waters. The captain will maintain daily contactwith a ship agent in Panama. The ship agent inPanama represents and attends to the financialaspects of the vessel transiting the canal, coordi-nates required logistics, and resolves any prob-lems the vessel may encounter throughout thetransit. The ship agent also keeps the TCCapprised of the vessel’s arrival at Panama Canalwaters (Wilson and Sorenson).

The Panama Canal, 80.5 km long and connect-ing the Atlantic and Pacific Oceans, extendsnorthwest to southeast. Three sets of locks raiseand lower vessels 26 m above sea level over theContinental Divide. The Atlantic entrance is53.9 km north and 43.5 km west of the Pacificentrance (appendix figure A).

A ship carrying grain from the U.S. Gulf entersthe Panama Canal waters of Limon Bay fromthe breakwater at Cristobal. From there, thevessel steams 10.4 km under tug assist to theGatun Locks, the first set of locks. Three “steps”at Gatun Locks, individual chambers into whichships are maneuvered, raise the vessel 26 m toGatun Lake. Each chamber is 34 m wide and305 m long. This first set of locks is about2 km long.

Vessels are scheduled to transit the canal in oneof two manners: first-come, first-to-transit orthrough a transit reservation system. Panamaxvessels, the largest vessels capable of transitingthe canal, were restricted until recently to day-light transits. They may enter the first lock atabout 6 a.m. to begin the 9- to 12-hour transit.Once in Panama Canal waters, the vessel willawait a transit time assigned by the transitscheduler at the TCC or if the ship has a reser-vation, the captain will wait until the reservationtime can be honored (Panama CanalCommission staff ). Reservations can be made inadvance for 26 cents per Panama CanalUniversal Measurement System,1 which is inaddition to the $2.57 PC/UMS assessed for aloaded vessel transiting the canal. If a vessel failsto meet its reserved time, it loses the paid fee andtransits the canal in a first-come, first-to-transitschedule. Upon arrival in Panama Canal waters,if a vessel is not scheduled to transit that day, itwill drop anchor and wait for its scheduled tran-sit time. Otherwise, the vessel will sail towardthe first lock.

Appendix Figure A–Profile of the Panama Canal System

SOURCE: Panama Canal Commission

1 Panama Canal Universal Measurement System—a volumetricmeasure of a vessel’s cargo—carrying capacity used forassessing each vessel’s transit toll.

Gatun LocksPedro Miguel

Locks

MirafloresLocks

MirafloresLake Pacific

Ocean

Panama CityBalboa

Gatun Lake

Madden LakeCristobal

Colon City

AtlanticOcean

The vessel can begin its transit only after thebank receives payment for transit. Before thetransit, a launch boat will deliver Panamanianinspectors, Panama Canal ship pilots, and otherservice providers to the ship. The Panamanianinspectors check the vessel manifest and itscargo, and they conduct admeasurements toassess the PC/UMS (if it is the vessel’s firstPanama Canal transit). The Panama pilots takecontrol of the vessel during its transit throughPanama Canal waters. The chief pilot willinstruct the ship’s captain as to the speed anddirection of the vessel. The chief pilot also willtell the tug operators, line-handlers, and locomo-tive engineers what assistance they need to pro-vide, while the pilot remains in contact with thePanama Canal TCC and each lock tower.

The captain then relays the pilot’s instructions tohis crew members, who perform the propermaneuver. As the vessel approaches the first setof locks, another launch boat delivers line-handlers to the ship. The line-handlers board thevessel and prepare to receive the cables, attachedto each locomotive, that pull the vessel througheach lock chamber. A Panamax vessel requires 20line-handlers, 12 locomotives (six at the bow andsix at the stern, three to port and three to star-board), and one tug pushing from the stern toassist the vessel through each lock. One pilot willremain on the bridge at all times, movingbetween the wheel room and to either wingbridge to call out instructions, “full ahead,” “rud-der 10 degrees,” “ahead one-third,” “midships,”etc. The other pilot will move about the vesselfrom bow to stern, port to starboard, keepingwatch on the ship’s progress throughout thecanal transit.

At the first lock, Gatun Lock, the chief pilot willhave the captain’s crew maneuver the vessel tothe approach wall, where the line-handlersattach the cables of the locomotives to the vessel.The pilot continues calling out maneuvers to thecaptain, and the vessel continues forward withassistance from the tug at the stern. When thevessel reaches the first chamber of the lock, line-handlers will attach the cables of the remaininglocomotives to the vessel and draw them tight tostabilize the vessel for entry into the chamber.

Together with the locomotives and tugs andunder its own power, the vessel moves into thefirst chamber, where miter gates close behind thevessel’s stern to lock it into the chamber. Waterfrom the second chamber flows into the firstchamber and lifts the vessel to the water level ofthe second chamber. Once the vessel has stoppedrising, the miter gates at the vessel’s bow open,and the vessel moves forward into the secondchamber with assistance from the locomotivesand under its own power. The process repeats forthe second chamber. In the last chamber, the ves-sel is lifted to the level of Gatun Lake. In eachchamber lockage, raising a vessel requires about15 minutes, and each lock transit will last from45 minutes to more than an hour. Transit time,however, will vary with daily vessel traffic. Oncethe miter gates of the last chamber open and thevessel has cleared the gates, the cables from eachlocomotive are released, and the vessel steamsthrough the tropical waters of Gatun Lake underits own power 37.8 km from the Gatun locks tothe Gaillard Cut. The water in Gatun Lakepushes ships through the lock chambers, using201 million liters of water for each ship transit.

The Gaillard Cut traverses 12.6 km through theContinental Divide of Panama at the highestpoint of the isthmus. Before construction of thecanal, the cut was more than 123 m above sealevel and 91 m wide. One portion was widenedto 152 m during the 1930’s and 1940’s, and theremaining portions were completed by 1971.Currently, the cut is being widened to 192 m inthe straight sections and 223 m at the curves toallow double passage of Panamax vessels.Panamax ships are limited to single passagethrough the canal until the widening project iscomplete. The PCC conducted tests in May1999 to determine the safety of a double passageof Panamax vessels and measure vessel perform-ance. In June 1999, double passage of Panamaxvessels began. The widening of the cut will befinished by 2002 and will increase transit capac-ity by about 20 percent.

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Once past the Gaillard Cut, the vesselsencounter the first of two locks that will lowerthe vessel to the level of the Pacific Ocean.The first lock, Pedro Miguel, has one chamber,11⁄3 km long, which will lower the vessel 9 m.From Pedro Miguel, the vessel sails into LakeMiraflores and proceeds about 2 km to theMiraflores Locks, whose two chambers lower thevessel to sea level. From the Miraflores Locks,the vessel moves toward the Pacific Ocean underthe Bridge of the Americas, where the pilotreturns the vessel to the captain and boards thelaunch boat.

A complete transit takes 9-12 hours after enter-ing the first set of locks, although a vessel mayanchor in the canal waters, waiting to transit thecanal, from a few hours to a few days. The authordetails a timeline of a partial transit in appendixtable A.

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Appendix Table A–Timeline of a partial Panama Canal transit of the M/V Aspilos1

Canal Location Time

Balboa 1435Enter Gaillard Cut (speed: 9-11 mph) 1445Exit Gaillard Cut 1545Line-handlers embark vessel 1550Approach wall of Pedro Miguel 1620In Pedro Miguel’s chamber and miter gates closed 1640Miter gates open 1655Final locomotive disengaged 1715Approach wall of the Miraflores 1750In Miralflores first chamber and miter gates closed 1800Miter gates open to Miraflores second chamber 1815In Miraflores second chamber and miter gates closed 1825Miter gates open and M/V Aspilos leaves second chamber 1840Final locomotive disengaged 1845Line-handlers disembark 1850Pass under Bridge of the Americas 1900Pilot disembarks, vessel steams into Pacific Ocean to Guyamas, Mexico 1910

Partial transit time for M/V Aspilos, from Gaillard Cut to disembarkation 5 hours 45 minutes

1 The M/V Aspilos, built in 1982, is a dry bulk vessel (It transports grain, ore, and logs.), operated by Greek owners and officers with aPhilippine crew under the Panamanian flag. The M/V Aspilos has five holds and five cranes and hauled 37,000 mt of white cornfrom New Orleans, LA (Continental Grain elevator), to Guyamas, Mexico. The weather was overcast, with high clouds, a slightbreeze, the temperature in the high 90’s, and high humidity.

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